Pat Gunning's Praxeological Economics Home Page
November 28, 2004
© J. Patrick Gunning
Table of Contents
“The Praxeological Concept of International Entrepreneurship” in Leo Dana (ed.) Edward Elgar Handbook on Research in International Entrepreneurship. Brookfield, Vermont: Edward Elgar. (2003)
"Ronald Coase’s Method of Building More Realistic Models of Choice." Review of Political Economy. 14: 2, 2002 (with Bingyuang Hsiung )
"New Subjectivist Economic Theory and Public Finance." Public Finance and Management. 1:3, 2001.
"The Property System in Austrian Economics: Ronald Coase's Contribution," Review of Austrian Economics (2000)
"Roy Cordato's "Austrian" Critique of Coase on Social Cost," Review of Austrian Economics (2000)
"H. J. Davenport's Loan Fund Theory of Capital," Journal of the History of Economic Thought. September, 1998.
"Herbert Davenport on the Single Tax," American Journal of Economics and Sociology, volume 56, #4, 1997.
"Herbert J. Davenport's Transformation of the Austrian Theory of Value and Cost," Perspectives on the History of Economic Thought, Volume Fourteen, London: Routledge 1997.
"Ludwig von Mises's Transformation of the Austrian Theory of Value and Cost," History of Economics Review, No. 26 Winter-Summer, 1997.
"The Theory of Entrepreneurship in Austrian Economics," in Keizer, W., Tieben B. and R. Van Zijp (eds.), Austrians in Debate, London, Routledge, 1997.
"Entrepreneurists and Firmists: Knight vs. the Modern Theory of the Firm," Journal of the History of Economic Thought, March, 1993.
"The New Subjectivist Elucidation of Entrepreneurship," Entrepreneurship, Innovation, and Economic Change, Vol. 1, No. 3, September, 1992.
"The Meaning of Entrepreneurship in Economic Theory: Historical Perspective," Entrepreneurship, Innovation, and Economic Change, Vol. 1, No. 2, June, 1992.
Working Papers ( abstracts below )
Papers on Praxeological Economics
Papers on Entrepreneurship and the Development of the Austrian Theory of Value and Cost
Papers on Equilibrium
Papers on Austrian Welfare Economics
Papers on Capital and Interest
Papers on Coase
Papers on the Trade Cycle, Credit, Money, and Banking
Ronald Coase's Method of Constructing More Realistic Models of Choice(With Bingyuang Hsiung)
Knight’s Theories of Socialism and Capital
This paper examines Frank Knight’s views on socialism and on capital and interest in light of some recent claims by Peter Boettke and Karen Vaughn. It makes several points that raise serious questions about the correctness of those claims. First, it argues that on the issue of socialism, the views of Knight and the Austrians was quite similar. Second, by more carefully examining Knight’s final contribution to the capital and interest controversy, it shows that the constructs he used – in particular the stationary economy and the Crusonia plant were quite appropriate for the goal he aimed to achieve. The Austrians did not understand this goal and there is no indication that they examined Knight’s final statement. Although Boettke and Vaughn refer to it, it is obvious that they also did not examine it carefully. Finally, the paper finds no justification for the claim that Knight differed from the Austrians on the definition or scope of economics. Knight was not interested in problems related to time preference, the period of production, or the time structure of production. But aside from that lack of interest, the definition and scope appear pretty much the same. The claim that Knight’s economics was, in general, only concerned with competitive equilibrium is false.
This paper describes a concept of the praxeological entrepreneur that is derived from Ludwig von Mises’s prerequisites and properties of action. It is a response to a claim by Tyler Cowen that Austrian economics should seek inspiration for such a concept in poetry or, more specifically, in the writings of G. L. S. Shackle. The paper claims instead that Austrian economics should seek its inspiration in the writings of Mises. The paper presents a brief history of entrepreneurship in Austrian economics and then describes Cowen’s views. This is followed by a discussion of Mises on the concepts of action, uncertainty, and modeling. The last two parts of the paper outline the concept of praxeological entrepreneurship as it has developed in the author’s published works and works in progress. The paper ends with a brief discussion about the practice of Austrian economics today.
The Procedure of Praxeological Economics and Its Relation to “Positive Economics”
This essay combines two ideas: (1) a praxeological view of the definition of the subject matter of economics (praxeological economics) and (2) the goal of evaluating arguments for and against market intervention on the basis of logic and relevance. Pursuing this goal and using the praxeological view has three important properties. First, it accounts at the most fundamental level for the fact that human actors are distinct from other animals and robots. Second, it satisfies the traditional goal in political economy to evaluate arguments for or against intervention in a market economy. Third, it is value free. Moreover, this combination implies a general procedure for evaluating interventionist arguments. The essay describes this procedure in four steps. Afterwards it uses the knowledge that is gained from deriving the procedure to assess some of the propositions that economists associate with the idea of positive economics. Five propositions are assessed.
Interest: In Defense of Mises
This paper evaluates Guido Hulsmann’s attack on Mises’s theory of time preference and market interest. It argues that his article is a mix of misinterpretation, questionable reasoning, and omission. It shows that Mises’s theory of time preference does provide a solid basis for explaining market interest, that (consistent with Mises) market interest contains both a time preference and an entrepreneurial component, and that Mises provided a procedure for disengaging these two components.
The Praxeological Foundations of the Employment Compact: Where the Firm Fits Into Austrian Economics
Ludwig von Mises, the 20th century champion of Austrian economics, asserted that the goal of economics is to evaluate arguments for and against government intervention in the market economy. He helped develop an economics that was especially suited for that purpose. Specifically he developed a price-quantity economics to deal effectively with several important arguments in favor of intervention: the socialist-Marxist exploitation hypothesis ( the theory of imputation), the possibility of centrally planning an economy (the theory of monetary calculation), the claim that interest is not deserved (the theory of profit and interest), macroeconomic intervention (the Austrian theory of the trade cycle), and price controls. The approach has also been used to show how the use of money prices economizes on the acquisition, communication and use of knowledge. However, many 20th century arguments supporting intervention cannot be handled with a price-quantity economics. A transactions approach is needed. This paper outlines such an approach – one that is based on the recognition of other transaction variables and pre-transaction actions. It goes on to show how the theory of the firm, as first described by Ronald Coase and then elaborated by those who followed, fits neatly into this approach. By this means it shows where the Coasean firm fits into Austrian economics.
The Praxeological Concept of International Entrepreneurship
This paper applies the concept of praxeological entrepreneurship to international economics. Praxeological entrepreneurship is the personification of the distinctly human features of the interaction of human beings under the conditions specified in the definition of the hypothetical pure market economy. The paper begins by attributing the technological progress and the growth of potential wealth to (a) distinctly human action and (b) the institutions associated with the market economy. It proceeds to describe the praxeological concept of the entrepreneur and to show how it is used in ordinary economics. Then it applies this procedure to the study of several issues in international economics. First it presents an addendum to the principle of comparative advantage. Next it describes a procedure for analyzing a nation's trade barriers. Then it shows how to use the concept of praxeological entrepreneurship to compare a two-nation global pure market economy with a two-nation global market economy in which the two nations have different policies toward liability for pollution.
Ronald Coase's Method of Constructing More Realistic Models of Choice (With Bingyuang Hsiung)
The goal of this paper is to present and defend the thesis that Ronald Coase's major contributions to economic theory are best understood by recognizing the distinct method he used to construct more realistic models of choice. We call his method thebenchmark-comparison method. It consists of constructing models of choice and then using the models as benchmarks in the further investigation of economic interaction. The further investigation entails either (1) comparing the benchmark models with observed interaction or (2) constructing additional models of choice which may themselves function as benchmarks.
The paper first describes the method. Then it demonstrates how Coase used the method in his two most famous papers. It goes on to show how an understanding of the method helps to confirm Coase's own hypothesis about the continuity in his thought. Finally the paper discusses the literature. It assesses Coase's critique of Milton Friedman's positivist methodology and it discusses a recent paper on Coase's methodology.
Roy Cordato's "Austrian" Critique of Coase on Social Cost
In his book on Austrian welfare economics, Roy Cordato uses what he describes as Austrian welfare economics as the basis for a scathing criticism of the Coasean approach to making judgments in tort cases. His criticism claims that the Coasean approach is both unrealistic and normative. Moreover, it would introduce uncertainty, thereby reducing individuals' freedom in pursuing their goals through the exchange process. To avoid all of these problems or at least to better deal with them, the economist who is interested in giving advice to judges ought to advocate a rule of strict liability regarding invasions of real (i.e., material) property. He claims that this rule is derived from Austrian economics.
This paper, which takes a "different" Austrian perspective, makes several arguments against Cordato. First, it argues that his recommended rule would not achieve the goal that he sets for it. It would increase the freedom of some people while reducing the freedom of others in pursuing their goals. Second, it argues that his criticism of Coase is misplaced. Contrary to Cordato's claim, Coase has not advocated day-to-day interventions in the market system based on cost-benefit calculations that assume general competitive equilibrium. On the contrary, like the Austrians, he has emphasized the difficult knowledge and calculation problems associated with this. Also, he has pointed out the preponderance of empirical evidence against such interventions. Moreover, Coase's recommendations do not concern day-to-day interventions at all. Rather, he has been concerned with the institutional structure, most especially with the initial delimitation of rights. This concern, which implicitly takes account of uncertainty, immunizes Coase's analysis from Cordato's uncertainty critique.
The Property System in Austrian Economics: Ronald Coase's Contribution
This paper argues that contrary to Roy Cordato's claim, Ronald Coase's work on the "problem of social cost" is an important contribution to Austrian economics. Coase identified a criterion that can be used to establish initial legal rights to control actions that have external effects. In other words, he discovered a criterion that, in some cases, can be directly applied to help establish a property system when there is none. The criterion also helps a government adapt, or maintain, a property system in light of continuing changes that are characteristic of the entrepreneur economy. Cordato's anti-state ethical economics, which he used to criticize Coase, is a deviation from the century-old tradition of Austrian economics. Menger, Mises and Hayek saw economics as a body of logical knowledge that is value free. In addition they recognized a role for government in defining legal rights and in maintaining the property system in light of changing conditions. Accordingly, it is wrong to invoke "Austrian economics," properly understood, to criticize this aspect of Coase's work. In this paper, I argue that Cordato has followed a deviant and troubling path by trying to construct an Austrian economics based on ethics, that he has failed to understand that a changeable property system is a prerequisite for the market economy, and that he has correspondingly failed to recognize Coase's contribution to the problem of how to maintain the property system in light of continuing change.
Equilibrium in Ronald Coase's Method
The aim of this paper is to describe the critical role that the concept of equilibrium played in Ronald Coase's two revolutionary papers on the firm and on social cost. He introduced his paper on the firm with a concept of equilibrium in which individuals were assumed to adjust instantaneously to changes via the price mechanism. He attributed this concept to A. Salter but Salter's concept can be traced further to J. B. Clark, who provided a methodological foundation for understanding its role in economic analysis. Later in history, the equilibrium was employed in rational expectations theory. Coase's paper expanded the Salter model to include adjustments to changes by means of firms. His paper on social cost expanded it further to include direct government regulations, rights to control actions that have external effects, and legislation.
Time Preference and Entrepreneurship: Ludwig von Mises on the Components of Market Interest
This paper shows how Ludwig von Mises distinguished the components of the market rate of interest and why such a distinction is important. His image of the evenly rotating economy (ERE) played an indispensable role. On the one hand, it enabled him to isolate entrepreneurship by means of a contrast with the robots of the ERE. On the other hand, it enabled him to identify a semblance of praxeological time preference by constructing an image of the ERE interest rate, which he called "originary interest."
The ERE and originary interest were essential elements in his procedure of bridging the gap between praxeological time preference and the loan interest rates in the market economy. Ultimately, he was able to distinguish three components of market interest rates: the social time preference component (originary interest), the entrepreneurial component, and the price premium (or inflationary-deflationary) component.
These components were integral parts of Mises's revised presentation of the trade
cycle theory in Human Action. In other words, without an understanding of the method
Mises used to derive the components -- i.e., without an understanding of the role of the
ERE in Mises's method -- one is unprepared to comprehend the latest version of the
Austrian trade cycle theory. The paper demonstrates this with citations from Human
Action. It also discusses a recent critique of Mises's effort by Peter Lewin.
Praxeological vs. Positive Time Preference: Ludwig von Mises's Contribution to the Theory of Interest
Mises's concept of praxeological time preference has been confused by neo-Austrians with the idea of positive time preference. Praxeological time preference refers to the idea that individuals acting in the consumer role distinguish between actions on the basis of whether they expect the effects to be felt sooner or later. Positive time preference goes beyond this to claim that some set of goods, money, or utility would always be preferred in the present to the same set in the future. Neo-Austrian economists have written as though the assumption of positive time preference is needed to explain a "positive rate of interest" in the market economy. This paper has three aims. The first is to show that Mises did not subscribe to the positive time preference view. The second is to discuss the claims to the contrary in order to show how this mistaken interpretation of Mises has evolved. The third is to present the basic assumptions that are necessary to deduce a positive rate of interest under the conditions of the pure market economy.
Austrian Welfare Economics?: A Misesian Response
Several neo-Austrian economists have proposed various standards for a special welfare economics to rival the welfare economics of the economics profession. This paper shows that two of these (Tyler Cowen and Israel Kirzner) contain implicit and vague definitions of social welfare that violate methodological individualistic principles. In addition, it argues that neo-Austrians misconceive the new welfare economics largely because they misconceive the role of equilibrium. Next, it shows that these neo-Austrian efforts are fundamentally different from the recommendations of Ludwig von Mises. Mises advised that economists should evaluate the logic of the arguments presented by others and should determine whether the arguments are relevant to the goal that the others want to achieve. They should evaluate arguments, not policies. Finally, it shows that Murray Rothbard's reconstruction of welfare economics is not based on Mises or subjectivism and that to follow it would render the fundamental task of economics, as Mises conceived it, impossible to carry out.
How to Be a Value Free Advocate of Laissez Faire: Ludwig von Mises's Solution
Ludwig von Mises is often regarded as a "champion" of laissez faire. This characterization seems to contradict Mises's clear statements that economics is value-free. The aim of this paper is to resolve this apparent contradiction. We accomplish this by distinguishing, as Mises did, between the advocacy of specific laissez faire policies and the advocacy of a laissez faire ideology vis Á vis the alternative ideologies of socialism and interventionism. Mises argued that the logic of a value-free economics could be used to show that socialist and interventionist policies would not achieve a goal that the socialists and interventionists implicitly or explicitly aim to achieve, that of progress in terms of material wealth for the members of the society. Thus, Mises resolved the contradiction by shifting the debate from the welfare analysis of particular policies to a logical analysis of the ends of a particular ideology and the means available to achieve those ends.
In a seminal paper in neo-Austrian economics, Murray Rothbard criticized Mises. This paper analyzes Rothbard's argument partly as a means of elucidating Mises's views. It argues that Rothbard misinterpreted Mises and quoted him out of context. Rothbard failed to adequately support his claim that Mises held the beliefs that Rothbard attributed to him. Moreover, Rothbard’s paper undermined the value-freedom that Mises regarded as a crucial characteristic of economics.
Non-Material Austrian Capital Theory and Loan Markets
This paper explores the non-material definitions of capital that were used by Carl Menger and especially Ludwig von Mises. Menger introduced the idea that capital is a businessperson's net worth devoted to earning income. Mises appears to have copied this definition, with added emphasis on the role of the entrepreneur. Mises also integrated this definition with a theory of loan interest. In the latter, he stressed time preference and the time structure of interest rates; entrepreneurship and economic calculation; how injections of money affect decision making; and the problem of aggregating the separate, private net worth of different individuals. It is argued that this notion of capital is superior to that of the material definitions used by other Austrian writers. It is superior because (1) it directs one's attention to higher order goods and time, (2) it avoids all possibility of confusing Austrian capital theory with the classical notion that interest is the price of capital goods, (3) it neutralizes any concept of "social capital," and (4) it places the focus on entrepreneurship, the entrepreneur point of view, and the entrepreneur process.
Entrepreneur's Net Worth: Mises's Praxeological Concept of Capital
In Human Action, Ludwig von Mises employed two radically different notions of capital. The first was equivalent to what accountants call net worth. In calculating her profit and loss, the individual conceives of her income in terms of a change in net worth. If we shift the focus to the income stream, net worth (capital) can be said to refer to the capitalized value of that stream. Thus, the concept of capital as net worth implies capital accounting. This notion was truly subjectivist and fully consistent with the subjective theory of value and cost that was initiated by the early Austrian economists. The second notion was produced material factors of production.
Mises recognized that the basis for distinguishing produced material factors from other non-produced and non-material factors was not consistent with the Austrian theory of value and cost. With some caution, he nevertheless employed the second notion, especially in his discussion of the relationship between economic action and time. One possible explanation for this was his desire to deal with the capital controversies of the period.
This paper carefully analyzes the passages in Human Action in which the capital goods notion is used. It concludes Mises unwisely restricted what could have been a broader discussion that would account for all factors of production (i.e., roughly higher-order goods, in Carl Menger's terminology). The significance of this lies in the fact that modern neo-Austrian economists have apparently neglected Mises's first notion and accepted his second notion of capital goods. Or they have ignored Mises altogether and employed the capital goods notion in their work. By doing so, they risk neglecting the subjective theory of value and cost in their discussions of the relationship between time and economic action. The paper also shows that some of Mises's capital goods' discussions are trivial and out of place.
The Praxeological Entrepreneur
The praxeological entrepreneur refers to action with regard to the economic data. Although Ludwig von Mises (1966) provided hints concerning how praxeological entrepreneurship could be defined and elucidated, he did not himself show do this. The paper expands on these hints by developing a more complete concept of the praxeological entrepreneur, based on his discussion of the nature and method of praxeology and economics. It distinguishes the praxeological concept from the market process entrepreneur that has been commonly used in the neo-Austrian literature. It explains why the latter is less fundamental and shows how to use the former to explain economic progress under the conditions of the pure market economy.
H. J. Davenport's Loan Fund Theory of Capital
American Herbert Davenport's (1861-1931) theory about how market interest rates are determined in an environment of free banking has three characteristics: (1) the praxeological idea of the entrepreneur point of view, (2) the reservation demand approach to the supply of loanable funds, and (3) the assumption that the bulk of money under a free market banking regime would consist of monetized debt.
Every actor begins his participation in the market economy with preferences, including time preference, knowledge of past prices, beliefs about the marketability of his current wealth, and beliefs about how he can gain by saving his wealth in different ways. We combine these characteristics by conceiving of a collection of reservation demands for funds, which we call private capital. Private capital is the source of funds that are ultimately used in business. Before they reach that stage, money must be lent, rights must be sold for loanable funds, and non-monetary wealth, and especially debt, must be monetized through banks. By providing guarantee and endorsement, individuals enable banks to monetize the debt and, by this process, to add to the loanable funds that are made directly available by savers. The resulting supply of loanable funds is partly borrowed by consumers and partly available for business. The loan fund is the amount that business borrows. Market interest rates are determined in the loanable funds market as a whole. Free market banks perform the combined functions of guaranteeing promises and creating credit money. The latter function can lead to a trade cycle by changing individuals' time preference.
Davenport was tagged with an undeserved reputation by Frank Fetter, in an apparently self-serving review of Davenport's major work. Fetter was a well known capital and interest rate theorist of the era. The paper provides an extended refutation of the Fetter criticism. It also criticizes references to Davenport in the neo-Austrian literature.
Herbert J. Davenport and the American Transformation of the Austrian Theory of Value and Cost
American Herbert Davenport (1861-1931) transformed the subjectivist theory of Carl Menger. The subjectivist theory sought to trace the cost of supply, or the separate prices of the factors of production, back to the preferences of the individuals acting in the role of final consumers of goods. Davenport transformed the theory by arguing that the tracing procedure must always pass through the minds of individuals acting in the role of the entrepreneur who takes account not only of preferences but also the means of satisfying those preferences. Davenport criticized the early Austrians for their marginalism and anticipated the later thought of Friedrich Hayek and especially Ludwig von Mises. In spite of his important contribution to subjectivist thought, his work is similar and has not yet been incorporated into subjectivist economics.
The Logical Concept of Equilibrium
The logical equilibrium is an image of robots behaving in a uniform way again and again yet in a timeless state. It is a descendant of John B. Clark's static equilibrium and its antithesis is the Walrasian general equilibrium, which is taken to be a simulation of a real market economy. Properly understood, it is part of what Ludwig von Mises called the method of imaginary constructions, a procedure that entails constructing counterfactuals to comprehend action. It helps one isolate appraisement and uncertainty bearing as fundamental properties of the entrepreneur role, the mandatory of the consumer role. One aim of this paper is to demonstrate this characteristic of the evenly rotating economy. A second aim is to show that Mises's own application of the evenly rotating economy as an endpoint, or "final state of rest," was unimaginative and misleading. It criticizes Mises for using the evenly rotating economy in conjunction with the promoting entrepreneur to refer to an equilibrium toward which the market process is tending. It also discusses Mises's idea that the evenly rotating economy is useful in the study of change and his use of equilibrium in market process analysis to contrast logical economists with mathematical economists.
The New Subjectivist Economic Theory and Public Finance
From the viewpoint of the new subjectivism, public finance is the study of how various forms of government action effect entrepreneurship. After briefly describing the development of the new subjectivism, this paper analyzes four branches of public finance: the theory of revenue exaction, the theory of externalities, the theory of public goods, and the theory of collective decision-making.
The Idea of the Entrepreneur Role as Distinctly Human Action: A History of Progress
This paper concerns the concept of the economic entrepreneur as the personification of the distinctly human, as opposed to robotic or exclusively behavioral, features of the interaction under the conditions specified in the definition of the hypothetical pure market economy. It presents a history of the gradual development of this concept. Beginning with the mid 18th century, it traces the concept through the early Austrian economists, Clark, Hawley, Davenport, Schumpeter and Knight. It culminates with Ludwig von Mises's treatise on Human Action (1966).
Since Mises was the first to actually define entrepreneurship in this way and to provide hints about how to elucidate it, the paper includes a more detailed description of his contribution. Of particular significance is his "method of imaginary constructions," in which a contrast is made between an imaginary robot economy and an economy comprised of human actors, the characteristics of whom the economist knows on the basis of intuition and experience.
Predatory Pricing as an Outcome of Competition
This is a brief subjectivist analysis of a story about predatory pricing written by Professor Randall Holcombe. Predatory pricing means pricing aimed at driving a competitor out of business in order to be able to charge a higher price than otherwise.
What it Means to Be an Historian of Economic Ideas
My view of this subject. It discusses the meaning of cause and effect, distinguishes between history and (natural) science, defines an idea about distinctly human interaction, and selects a meaning for economics. Based partly on an interpretation of Jean Piaget's theory of human development.
Ludwig Von Mises on Economics, Ideology, World View and the Aim of Economics
Brief description of the meaning of these ideas in Mises's Human Action (1966).
Israel Kirzner's Entrepreneurship
Israel Kirzner defines the entrepreneurial element in human decision making as the behavior of following a spontaneous, subconscious hunch. The result is a greater satisfaction of wants, as viewed from the standpoint of superior insight. The entrepreneurial element also corresponds to what Kirzner calls alertness to hitherto unrecognized opportunities.
In a market economy this entrepreneurial element becomes manifest in arbitrage. Arbitrage is the subconscious discovery of price differentials as viewed from the standpoint of a general equilibrium. Entrepreneurial actions, or arbitrage, are said to lead to a general equilibrium. Thus, the study of entrepreneurship is the study of how subconscious arbitrage in a disequilibrium situation lead to equilibrium. This essay is basically a description of Kirzner's image of entrepreneurship without comment. It is not an assessment
Ludwig von Mises used the term "praxeology" to mean "theory of human action." A theory of human action consists of the logical conclusions that can be drawn on the basis of assumptions that "everybody knows to be true from their own actions." In describing this branch, Mises assumed that everyone understands a priori the use of means to achieve ends. "Action" refers to precisely to the thinking and choosing that people associate with this use of means to achieve ends.
Praxeology, Economics and Ethical Philosophy
In his book Human Action (1949), Mises argued that praxeology is value free since it is a set of logical deductions from universal ideas. He also argued that economics, correctly understood, is a branch of praxeology. Therefore, it is also value free. In other words, it contains no ethical premises or implications aside from those that one might base on the knowledge obtained by working through the logic.
This paper describes Mises's argument and extends it. It constructs a diagrammatic scheme for classifying a number of branches of praxeology. It shows the relationship betweentheory (logical deductions from assumptions) and history (the interpretation of historical events by referring to the means and ends of historical individuals). Finally, it identifies a new branch of praxeology called "the theory of interaction among consensual ethical philosopher." The purpose of identifying this new branch is to evaluate an argument by Hans Herman Hoppe that praxeology can be the basis for an ethical philosophy. The paper also criticizes Hoppe's claim that the seeds of this argument are contained in Mises's work.
Hayek, Free Banking, and the Commodity Money Syndrome: Toward A Praxeological Theory of Credit and Money
F. A. Hayek predicted that free banking would result in the emergence of a medium of exchange based on the right of a holder to exchange a unit of the medium for a fixed set of commodities. In this, he conforms to the norm among writers in Austrian macroeconomics of linking money tightly to commodities. A different approach was followed by some relatively obscure American writers, who claimed that macroeconomic thinking ought to be based on a theory of credit and fiduciary money. These writers developed a theory of the emergence of money that stood in opposition to Carl Menger's theory based on goods with different degrees of marketability. This paper reviews the Austrian theory and the credit theory of free banking. It defends the argument that a realistic Austrian theory of free banking under modern conditions should be based on a theory of credit. In such a theory, entrepreneurship would have free reign to invent contractual arrangements to support a credit money that yields a return to holders and users in one form or another. In addition, there would be innovation in the property system to reflect the demand for changes in contract law that are more amenable to entrepreneur-initiated developments in the credit system.
Short and Long Period-of-Provision Goods During an Austrian Trade Cycle
This essay presents a model of the effects of an increase in the quantity of money introduced through loan markets under rigid assumptions. It traces those effects through loan markets and resource markets. Its main contribution is its focus on two different consumer goods industries: a durable good industry with a long period of production and a perishable good industry with a short period of production. It is especially concerned with the theory’s deduction that there will be a shortage of the latter good during the contractionary phase of the cycle.
Overinvestment and Malinvestment
This essay distinguishes between the concept of overinvestment and the distinctly Austrian concept of malinvestment. It first describes these phenomena in a strict gold standard environment. Then it describes them in a credit money environment.
Understanding Democracy: An Introduction to Public Choice. Taipei, Taiwan: Nomad Press, 2003.
The Failure of the New Subjectivist Revolution: A Critical Essay on the Economic Theory of Ludwig von Mises's Economics, Fort Myers, Fl. and Taipei, Taiwan: Nomad Press, 1994.
The New Subjectivist Revolution: An Elucidation and Extension of Ludwig von Mises's Contribution to Economic Theory, Totowa, New Jersey: Rowman & Littlefield, 1990. Now at Fort Myers, Fl. and Taipei, Taiwan: Nomad Press, 1990.
Knowledge and Entrepreneurship: A Textbook in Microeconomics (An Austrian perspective: some incomplete chapters)
Introduction to Economics (A simple introduction from an Austrian perspective: some incomplete chapters)
J. Patrick Gunning
Professor of Economics/ College of Business
Feng Chia University
100 Wenhwa Rd, Taichung
Please send feedback